Where is cash when you need it? Here’s an in-depth look at the art of raising good debt over bad in a world characterised by a number of emerging new trends.
The stats on SME survival are pretty frightening. Small businesses are under pressure and figures show we are bouncing along the bottom of the economic down curve. Advisors shake their heads and lament they haven’t seen it this bad for a long while.
For some business owners, particularly in the retail sector, it is far worse than in 2008 when the Global Financial Crisis (GFC) officially began. In some neighbourhoods, ‘’For Lease’’ signs are appearing in the high streets as even long-term and previously tenacious business owners shut the doors because cashflow and access to cash from the usual sources, is grinding to a halt.
Lack of cash is affecting big and small business
SME owners aren’t the only ones to do it tough. On a daily basis we are seeing large companies affected, some of them leading household names. They are either choosing to call it quits and make redundancies, or being forced to re-emerge and morph into new entities.
These new entities are often online and in this world, access to cash is easier. The set-up of online businesses and investment in them, is booming, and more and more business owners are closing the doors on the old ways to make money to try a new way. It is an emerging trend. There are business people successfully taking advantage of the digital economy and our increasing online buying habits.
Do online businesses have better access to funds?
Dale McCarthy, founder of Sydney-based digital venture capital company, The Foundry says: “We are being inundated with digital start-up entrepreneurs wanting help to fund their ideas and it’s an interesting time in our specific niche. These emerging digital business owners are smart, fast-thinking and see the opportunity to create online businesses with little overheads.
“Our mission is to mentor them as well as raise funds so they are more likely to succeed. We invest in high quality people with disruptive digital ideas who have managed to get started and off the ground.”
But what about established businesses?
Sure, start-ups need funding, both online and traditional models, but established businesses may also need to raise funds during their lifetime and on more than one occasion. So when do you make the decision to borrow cash? And when do you call it quits? And if you borrow, where, how, from whom and what do you borrow?
What is it really like out there?
Right now, some of my clients are finding it hard to raise funds. If you believe what you read, money and cash is scarce. My relationship manager at Commonwealth Bank tells me he his department and team of advisors are doing all they can to help his network of clients.
From my research and experience, money is there when you need it, but how do you know where to go, and how to get ‘’investor ready’’ and then what are the parameters of raising funds? Here are my top 3 steps to raising cash.
Step One: define why you need to raise the funds
The reasons are varied. You may need to:
- Hire new people, buy new equipment
- Grow the company with an increased sales and marketing investment
- Gain more working capital
- Enhance your credit or borrowing status
- Launch new products
- Fund acquisitions
- Retire debt and clean your balance sheet
- Replace shareholders
To make it easy to attract money to your business, you need to be completely clear on why you need the funds. An investor told me if you want to borrow cash, you have to be able to describe what you want the money for on the back of an envelope.
Step two: Get investor ready
Investor readiness is all about getting set for investment. You need to make it easy for investors to make the decision to invest in you.
It sounds like common sense but few business owners get it right. Make sure you give your prospective investor all they need to make an informed decision about lending you money – e.g. you need to be able to answer:
- What does your company do?
- How does it make money?
- How much do you want?
- Who is running the company?
- What IP do you own – is it protected?
You will need to offer a plan for your investor to exit – e.g. what will the investor get out of the investment and when will they exit the loan?
Step 3: Decide how much involvement in your business
McCarthy advises: “There are investors out there who want a heavy return from your business with little involvement and those who don’t. But there is the opportunity to access great foresight, experience and management skills from your investment team to help you get where you are going much faster. The latter is a win-win model for the business owner and the investment team. “
Where is money in this tighter economy?
The myth is money is difficult to come by, but there is money out there IF you have a decent proposition.
- The banks will still lend if you give them a good enough case
- Angel investors are on the lookout for new opportunities and will look ruthlessly at the return you can provide them
- Venture cap funds will also want a solid exit plan and to know the estimated return up front
- Family and friends are sometimes the easiest but the most potentially complex source of capital – proceed with caution, but it IS an option
- Government grants are available but you can’t get the money if you don’t research and apply!
- Your own savings – perhaps the safest bet. Nothing like backing your own idea with your own funds.
What is good debt v bad debt?
If new and long established businesses often need re-financing it must be a misconception that any type of debt is bad debt.
In reality, when used correctly, loans and debts are a viable and necessary option to grow and sustain your business and knowing the difference between good and bad debt is important. Good debt is about loans that create wealth for you e.g. buying assets. Bad debt is debt that doesn’t make you money or build you an asset base. Sometimes in business you need to get involved in both. It’s important to acknowledge the difference and plan your repayments and debt plan before you sign on the dotted line. Good luck. There are opportunities out there.
- The first thing to decide is why you want the funds – be really clear. Not much point throwing good money after bad
- Then decide where will you source the cash from and when and how you and your investor plan to exit the loan
- The priority then is to get ‘’investor ready’’ to put you and your investor in the best position to successfully obtain the funds.